Chapter 9: Equity Securities - Introduction Flashcards
Holders of ownership shares rights and benefits (4)
1.Dividend payments
2. voting rights
3. Limited Liability
4. Distributions of assets in the event of liquidation.
Types of voting rights (3)
- straight voting
- cumulative voting
- proxy voting
Straight voting
one vote per share of common stock - most common form of voting rights.
Cumulative Voting
one vote per share times the number of seats on the board of directors
Proxy Voting
involves sending a written authorization to an agent to cast the vote for the shareholder.
Preemptive Right
enables the owner to maintain their ownership percentage in the event of a new stock offering or stock split, etc.
Earnings per share
profit earned by the company on a per share basis
Earnings Per Share calculation
Net Income - Preferred stock dividends
/
weighted average number of common shares outstanding
what two choices do companies have to make when they experience positive net income?
- reinvest earnings into new or existing projects
- pay out dividends
what does a lower Earnings Per Share (EPS) represent?
dividend payments are sustainable for the corporation
What does a higher payout ratio suggest?
the company does not have suitable alternative projects in which to invest.
Payout ratio calculation
dividends per share
/
earnings per share
what does the Payout Ratio tell about a company?
the long term sustainability of a company’s dividend payments and policy
retention ratio
the percentage of income retained by a company
Retention Ratio calculations (2)
A:
1 - Payout Ratio
B:
Net Income - Dividends
/
Net Income
Dividend Yield Percentage calculation
total annual dividends per share
/
stock price per share
the dividend declaration date
the date then the board of directors declares a dividend payment
Ex-Dividend Date / Date of Record
the date of record is the date the company determined who owns the company stock for the purpose of receiving the dividend
to receive the dividend, the shareholder must have bought the shares before ____________ date
The Record Date / Ex-Dividend Date
The payment date
the date the dividend payment will be paid
Dividend Reinvestment Plans (DRIPS)
plans that allow investors to received dividends in cash or automatically reinvest the dividends in the company’s stock
Reinvested Dividend taxation
taxable as ordinary income in the year they are paid
why may capital gains be preferred over dividend payments?
due to the deferral of taxation on capital gains.
what does a stock split do (2)?
- increases the number of issued and outstanding share of stock
- decreases the par value of the stock.
Reverse Stock Split
when a company wants to reduce the number of outstanding shares of corporate stock. This will increase the share price proportionately/
A round lot
100 shares stock
defensive stocks
are relatively unaffected by general fluctuations in the economy.
cyclical stocks
prosper during expanding economic times
blue chip stocks
issued by highly regarded investment-quality companies
income stocks
make large dividend payments relative to other companies
examples of defensive stocks
companies that provide everyday household items such as:
food
healthcare
household products
examples of cyclical stocks
automobiles, paper, cement, airlines, railroads, machinery and steel
examples of blue chip stocks
proctor & gamble
home depot
exxon mobile
examples of income stocks
utility companies
interest sensitive stocks
when the performance of a company is significantly affected by changes in interest rates
examples of interest sensitive stocks
the housing industry
value stocks
stocks that are trading low based on their historical earnings and current asset value.
tend to have low price to earnings ratios.
Tech stocks
stocks in the technology sector
the three classes of common stock
Class A
Class B
Class C
Class A Common Stock
Is owners by regular investors and gets
1 vote / share
Class B Common Share
is owned by company founders and gets
10 votes / share
Class C Common Shares
Is owned by employees and gets
No voting rights
cumulative preferred stock holder
Receives preferential treatment in comparison to common stock holders.
They receive any skipped or unpaid dividends before common stockholders.
who gets paid before preferred shareholders in the events of a liquidation?
secured and unsecured creditors
American Depository Receipts (ADRs)
certificates issued by US banks that represent ownership of a foreign company stock.
what is the Down Jones used to measure?
the status of the equity market
example of an equal-weighted index
NASDAQ
example of a market cap-weight index
S&P 500
market cap-weighted index
reflects changes in the value of the component companies, since larger firms have a greater impact than smaller firms.
Long position
purchase of an asset in hopes that it will appreciate over time
short sale
where an investor profits from an Assets declining value
how much risk does the stock seller retain for a short sale of an equity stock?
unlimited risk, if the stock’s price increases.
who is responsible for the dividends paid during the short sale period?
the short seller
margin accounts
where investors borrow funds from the broker to purchase additional securities.
what is the margin position amount set by the federal reserve for an investor of a margin account?
minimum initial margin set at 50%
margin position caluclation
account value - debt
/
account value
margin call price calculation
debt
/
1 - maintenance margin
market order
is an order to buy or sell a security at the best current market price
limit order
Order to acquire or sell a security at a specific price
Acts as a ceiling for purchases and as a floor for sales
Held until filled or canceled
what do limit orders enable an investor to do?
enables the investor to set a purchase price lower than the current price and a sell price higher than the current price
stop orders
used to limit losses or protect gains
stop-loss orders
if the market price reaches a certain point, the stop order will turn into a market order.
used to protect investors from large losses
stock-limit order
an order to buy or sell a stock that combines the features of a stop order and a limit order.
once the stop price is reached, a stop-limit order becomes a limit order that will be executed at a specified price or better.
trailing-stop orders
an order that trails the current stock price by a specific dollar amount or percentage.
maintains proximity to the current market price and does not have to be cancelled and re-entered as the price varies.
who typically purchases round lots?
institutional investors
odd lot
any trade with fewer than 100 shares
bid price of a stock
the price a security dealer will pay for a security
ask price for a stock
the price at which a security dealer will sell a security
bid-ask spread
the difference between the two prices and is compensation paid to the dealer.
the three methods of owning equity securities
- physical certificate
- street name registration
- direct registration
Day orders
orders that are good/active until the end of the current day’s market close.
Good till canceled (GTC)
orders remain in effect until these are filled or until the investor cancels the order.
Fill-or-kill (FOK) orders
are either executed immediately in the entirety or canceled.
All-or-none (AON) orders
are buy or sell orders that must be executed in the entirety but remain active until these are executed or canceled.
Immediate or cancel (IOC) orders
are similar to FOK orders, except these can be partially filled.
